President Trump’s Tax Proposal
On September 27, 2017, President Trump revealed a tax plan that he and key Republican leaders in Congress have been working on. The plan is entitled “United Framework For Fixing Our Broken Tax Code.” If enacted, the proposal would affect most tax paying Americans. However passage is uncertain, and modifications to the plan are certain to occur. The following is a summary of the proposal’s key elements.
- The personal exemption for dependents would be eliminated
- The standard deduction would be roughly doubled to $24,000 for taxpayer filing jointly and $12,000 for single filers. The additional standard deduction and personal exemptions for spouses would be combined into these new amounts. This creates a zero tax bracket for the first $24,000 of income for married filing joint taxpayers and $12,000 for single taxpayers.
- The tax brackets would be reduced from seven to three: 12%, 25%, and 35%. An additional top tax rate may apply to the highest income taxpayers to ensure that the reformed tax code is at least as progressive as the old tax code and does not shift the burden from high-income to low-income and middle-income taxpayers.
- The child tax credit would significantly increase. As under current law, the first $1,000 would be refundable.
- The income limits for which the child tax credit is phased out would be increased. The marriage penalty in the existing credit would be eliminated. It is expected that more middle-income families will qualify for the credit.
- A non-refundable $500 credit to help cover the cost of caring for non-child dependents would be created.
- The Alternative Minimum Tax would be repealed.
- Most itemized deductions would be repealed except for charitable contributions and the home mortgage interest deduction. Some Republican Congressmen in high tax states are pushing back on this provision.
Observation: Taxpayers in the existing 10% bracket are expected to be better off under the new plan due to the larger standard deduction, larger child tax credit, and additional tax relief that is expected during the committee process.
- The Estate and Generation-Skipping Transfer Tax would be repealed. It is important to remember that even if this provision becomes law, many states still have an Estate tax.
- The business income of small family-owned businesses conducted as sole-proprietorships, partnerships and S corporations would be taxed at a maximum rate of 25%. The proposal suggests that measures will be adopted to prevent the recharacterization of personal income into business income so as to prevent wealthy taxpayers from avoiding the top personal rate.
Observation: If this provision becomes law it will be interesting to see how the strategy of taking a minimum salary from an S corporation in order to avoid FICA tax is affected.
- The C corporation tax rate would be 20%.
- The Corporate AMT would be eliminated.
- Businesses would be allowed to immediately deduct the cost of investments in depreciable assets other than for structures. This would apply to all costs incurred after September 27, 2017, and would be allowed for five years.
- The deduction for C corporation net interest expense would be limited.
- The Domestic Production Deduction (Section 199)would be eliminated.
- The proposal suggests that other than for the Research and Development Credit and Low Income Housing Credit most other business credits would be eliminated
- The Worldwide Tax system will be replaced by a Territorial Tax system. Dividends received from a foreign subsidiary will be 100% exempt from tax if the US parent owns at least 10%. To transition to the new system, foreign earnings that have accumulated overseas will be treated as having been repatriated. Accumulated foreign earnings that are not liquid will be subject to a lower rate of tax than foreign earnings held in cash or cash equivalents. Payment of the tax liability would be permitted over several years.
- To prevent companies from shifting profits overseas, the proposal includes rules to protect the US tax base by taxing at a reduced rate and on a global basis the foreign profits of US Multinational companies. Rules will be incorporated to level the playing field between US- headquartered parent companies and foreign –headquartered parent companies.
Although just proposals these provisions need to be considered when talking to clients about various matters including estate planning, year-end tax planning and entity formation. The 3.8% Net Investment Income tax and .9% Additional Medicare Tax would still be in play.
ABOUT THE AUTHOR
John M. Stevko, CPA, has over 40 years of professional experience as a tax practitioner national seminar instructor, writer, and business owner. John began his career with what is now a “Big 4” public accounting firm before founding a local CPA firm in Beaverton, Oregon. At that same time, John began speaking for Gear Up Tax seminars and eventually becoming the managing partner of the business. John has lectured on tax law and healthcare reform throughout the country at national conferences and in-house for top 100 CPA firms and the large banking industry. He has also appeared on television and radio programs seeking his expertise on tax and healthcare legislation.